Stoog Enterprises manufactures ceiling fans that normally sell for $90 each. There are 300 defective fans in inventory, which cost $55 each to manufacture. These defective units can be sold as is for $20 each, or they can be processed further for a cost of $40 each and then sold for the normal selling price. Stoog Enterprises would be better off by a

Question

Quizplus · Accepted Answer

If the defective fans are sold as is, Stoog Enterprises will receive $6,000 (300*$20) while incurring a cost of $16,500 (300*$55). This will result in a net loss of $10,500.

If the defective fans are repaired and sold at the normal selling price, Stoog Enterprises will receive $27,000 (300*$90) but will incur an additional cost of $12,000 (300*$40) for the repair, as well as the original manufacturing cost of $16,500. This will result in a net increase in operating income of $-1500 ($27,000 - $12,000 - $16,500).

Therefore, selling the defective fans as is would result in a net loss while repairing them would result in a smaller net loss. The best choice is to repair the defective fans.

Stoog Enterprises Manufactures Ceiling Fans That Normally Sell for $90